Coward's Portfolio

[Geoffrey]

Hi, I'm Geoffrey! I've been lurking on this board for quite some time and have learned that there are a lot of users here far wiser than I when it comes to investing. So, I am hoping for a little free advice (LBYM at work!). I'm nearing retirement after a career in the federal service. I've been a consistent contributor to our Thrift Savings Plan and have always squirreled away at least 20 percent of my net pay. The problem I have is that I am ultra conservative when it comes to investing. I just can't bring myself to risk any of my savings on anything but the most conservative investments. Consequently, the performance of my "portfolio" has significantly trailed the performance enjoyed by most of my peers who have accepted greater risk. To illustrate, I presently have about $500K invested in EE-bonds and I-bonds, and all of the TSP is invested in the G-Fund. I have attached a snapshot of my investments to better illustrate just how conservative I have been. Even my brokerage account is nearly all invested in a money market account. I am painfully aware of how foolish I have been, but my low tolerance for risk simply has not allowed me to venture into stocks, bonds, reits, etc. As I near retirement I realize that my dismal returns are not going to keep up with inflation. I think I am ready to "rebalance" my "portfolio." Can anyone suggest a very conservative, but more more rewarding approach than I have employeed thus far? What is the ultimate "coward's portfolio?" Any suggestions about how to redistribute my savings into more productive investments, while maintaining low risk, would be greatly appreciated!

[Nords]

Welcome to the board, Geoffrey.

Quote:

Originally Posted by Geoffrey The problem I have is that I am ultra conservative when it comes to investing. I just can't bring myself to risk any of my savings on anything but the most conservative investments. Consequently, the performance of my "portfolio" has significantly trailed the performance enjoyed by most of my peers who have accepted greater risk. As I near retirement I realize that my dismal returns are not going to keep up with inflation. I think I am ready to "rebalance" my "portfolio." Can anyone suggest a very conservative, but more more rewarding approach than I have employeed thus far? What is the ultimate "coward's portfolio?" Any suggestions about how to redistribute my savings into more productive investments, while maintaining low risk, would be greatly appreciated!

Well, if this was a conservative-portfolio horserace you'd be leading by several lengths. So which is more important to you-- being conservative, or staying ahead of inflation?

Groucho Marx was once asked what he invested in, and he responded "Treasuries." The interviewer commented that you can't build a retirement on Treasuries, but Marx said "You can if you buy enough of them." So the "solution" to your "problem" could be as simple as piling up more of your current asset allocation until you have enough to last 40 or 50 years. Of course that means you may have to work for a long time.

You say that you want to maintain low risk, but you don't explain what you mean by that r-word. You've already identified that you're getting hammered by inflation risk, so your inflation-eroding portfolio could theoretically be labeled "high risk". Are you referring to the risk of losing principal, the risk of investing in individual stocks, the risk of not diversifying among asset classes, or (as most people mean) the risk of excessive volatility?

You need to decide which of the risk factors in the last paragraph scares you the most and then allocate your assets accordingly. Of course you may also decide to embrace one or two of those risks if it means you don't have to work for another 30 years to avoid them.

If you're looking for more education then read Bernstein's "Four Pillars", especially the sample portfolios at the back of the book, and consider a lifestyle strategy fund...

[Ed_The_Gypsy]

Geoffrey,

You have a great start!

You are right to worry about inflation. It is a much larger risk than market risk and a lot more certain.

Would you be comfortable with the idea of putting, say, 60% into a total stock market index fund and 40% in TIPS? If you did this and took 3.5% of its value out every year, your income stream would last forever regardless of what 'the market' was doing. This conclusion comes from back-testing for as far back as there is data, about 100 years, through the Great Depression and everything. (OK, we didn't have TIPS, but they are an improvement.)

Yes, the 'market' will go down. It has gone down 50% or more sometimes. But there are only three periods in history when it was 'under water' for ten years, and it paid dividends all that time! If you live off the dividends, you are OK. When you buy an equity you are really buying an income stream. You don't lose money until you sell an equity whose price has dropped (or until you can't sell it because the company went banko and isn't there anymore). If you sold when it was going down, you would never recover. If you had the time to wait, you would have been rewarded with ~11% returns over time. Let the managers of the mutual fund decide what and when to buy and sell. You just own the mutual fund, hang on forever and take the dividends.

If you use a total stock market index fund, you own EVERYTHING, and the entire US economy is not going to disappear. I am a little more paranoid. I am 50% in the whole US market and 50% in non-US markets through index funds.

Find this guy's book: The Coffeehouse Investor
Bill Schultheis shows simply and clearly why inflation is what we should fear most and how to deal with it.

This site: https://www.bernstein.com/public/sto...d=4640&nid=184
shows why dividends matter and price not so much.

Oh yeah: You can do it yourself. Do not hire a broker. Do not hire an insurance company.

[cute fuzzy bunny]

Quote:

Originally Posted by Nords So which is more important to you-- being conservative, or staying ahead of inflation?

Quote:

Originally Posted by Ed_The_Gypsy You are right to worry about inflation. It is a much larger risk than market risk and a lot more certain.

DING DING DING!!!


I've found that there are several types of investors. Those playing to not lose too badly (but they'll lose nevertheless), those trying to knock the skin off the ball, chase it down and pound on it some more, and those who can find a happy medium.

I suspect the most successful and happy bunch are the latter.

Even the most conservative mutual funds targeted at 65+ year olds with a shorter retirement horizon than the average ER allocates 25-35% to stocks and very little to cash.

[Dawg52]

Quote:

Originally Posted by cute fuzzy bunny Even the most conservative mutual funds targeted at 65+ year olds with a shorter retirement horizon than the average ER allocates 25-35% to stocks and very little to cash.

Well you have managed to build a nice stash even though you have been conservative. Congrats!

I would think even you could stomach a very conservative allocation as CFB has suggested. Take a look at Vanguard's Retirement Income Fund. Roughly a 30% stock, 65% bonds, 5% cash allocation. Also take a look at the other target funds Vanguard offers.

https://flagship.vanguard.com/VGApp/...FundIntExt=INT

[cute fuzzy bunny]

Of course, I should play devils advocate and wonder about pushing the guy from cash to bonds and equities at a time when some say bonds arent a good investment and equities are somewhat more than fully valued...

[Dawg52]

Quote:

Originally Posted by cute fuzzy bunny Of course, I should play devils advocate and wonder about pushing the guy from cash to bonds and equities at a time when some say bonds arent a good investment and equities are somewhat more than fully valued...

Yep, the old timing issue. If he does convert to something else, probably should do it slowly over time. I wouldn't monkey with his cd's anyway as he has pretty decent rates.

[clifp]

I think he does have some terrific rates for CD 6.25% wow.

As a small step. I'd suggest putting 100% of your future TSP contributions in equities. Moving a large portion of your brokerage account into an ETF like the Vanguard Total Stock Market (VTI) and your ROTH IRA into say an international fund, or international ETF. This will result in your equities exposure being about 10%. Assuming a few more years until retirement with your future contribution being put in equities you may reach a retirement level with 20% equities 80% cash/bonds.

Now while for almost everybody on the board this is a really low equity asset allocation for you it maybe fine.

Roughly speaking your current portfolio will allow you a withdrawal of 3% adjusted for inflation (right now his CDs exceed 3% real money market equal 3% and his EE bonds/I bonds are probably at the level.) or $42,000.

I suspect that given your LBYM lifestyle, 42K, along with your government pension (with COLA), and future SS, you'll have sufficient income. So you don't need to take much risk, if you aren't comfortable with the market.

Sleeping well at night is worth a lot of money to some people.

[Alex]

Geoffrey,
Experts agree that you should have at least 20% of your portfolio in equities regardless of age. Believe it or not, this diversification keeps your risk the same and greatly increases your long term returns!! So do the 'safe thing' and commit 20% or more of your portfolio to equities.

Quote:

Legendary value investor Benjamin Graham recommended holding no more than 75% stock and no less than 25%. William Bernstein points out in his book "The Four Pillars of Investing" that a portfolio with 80-85% stocks and 15-20% in bonds and cash reduces downside risk to a significant degree while hardly reducing returns at all. Here are the numbers. Please note that the returns used are historical. Future returns may be lower. Potential losses, however, are related to asset allocation and not returns, so they would remain about the same. Average Annual Return 1960-2004 100% Stock Portfolio = 10.6% 80% Stock, 20% Bonds = 10.1% Loss in 1974 Bear Market (Worst Year Loss) 100% Stock Portfolio = -28.4% 80% Stock, 20% Bonds = -22.7% The 100% stock portfolio did 4.7% better in returns than the 80/20 portfolio, but lost 20% more in one year. On the other end of the spectrum, having no stocks at all exposes older investors to no growth, which may mean faster drawdown of their portfolios. Also, having 15-20% stock and the rest in bonds and cash actually provides little or no additional risk and better returns. Here are the numbers for the reverse portfolios of 100% bonds and 80% bonds and 20% stock: Average Annual Return 1960-2004 100% Bond Portfolio = 7.2% 80% Bonds, 20% Stock = 8.1% Loss in 1969 (Worst Year Loss) 100% Bond Portfolio = -8.1% 80% Bonds, 20% Stock = -8.2% Data from Vanguard

[OAG]

Why do anything? The current savings will produce about $52K at 4% withdrawal with virtually NO downside. No mention of age and if there is a pension from work coming -- SS is coming (maybe sooner than later). No mention of needing a large pot to lave behind. Inflation has been 3% for the past 30 years and the current rate of return is about twice that. Conservative is not a bad thing, which I think OP has proved.

[cute fuzzy bunny]

Perhaps.

Its also a particularly good time to see nice rates on cash instruments. Such was not the case until a year or so ago, and may not be the case a year or two from now.

One could make a similar case looking at recent equities markets and presume that the 22% one year and 14% annualized 3 year returns are pretty nice, and plunk all their money into equities.

In general and over time, cash returns barely beat the CPI.

Which is why asset allocations including several asset classes are a bit more survivable.

[OAG]

I tried to attach a word document with interest rates and cpi numbers over the past 8 years but was not able to get it to work. However, the cpi has averaged 2.8% over the past 8 years (high of 4.1% in 2006 and a low of 1.4% in 2003 according to the SS CPI Annual numbers). In the same period I have purchased NCUA and FDIC CD's at an average APY of 5.94% and a APR of 5.75 with maturities out as much as 7 years (a high of 6.59% APY in 2000 and 2001; also as much as 6.25 in 2006 and 2007) and a low of 5.00 in 2003.

I know conventional wisdom is to be in the stock market but being "ultra-conservative" can and, for some, will work too. Depending on age, other resources, need to leave funds behind, cash can do it.

[cute fuzzy bunny]

Try it a little longer than 8 years...

[OAG]

I have been doing CD Ladders for 28 years (1979 to date). Average return in those ladders has been a 5.7% return over the same 28 years. I like your chart but why do you show only the Treasury Bills and LT Government Bonds? Even with the last 28 year inflation average of 3.67% I have always been able to get AT LEAST a 2% or better REAL rate of return. Currently I am getting about 3% REAL return on new purchases.

During the same period I have dabbled in 2 Mortgages (Carter years), Mutual Funds (for about 5 years) and believe me I agree you MAY make more in the stock market BUT 1987, 1990, 1992-1995 may have something to do with this "old guys" need to be conservative.

Anyway, I really was not intending to hi-jack this tread but just wanted to point out depending on OP's financial needs and other resources that OP should consider ALL of the options. Thus far OP has done very well for him/her/their-selves and to change now should be given serious consideration (not all change is good).

[grumpy]

If you are comfortable with your low risk investments and along with your pension and SS they will produce more than enough to meet you post-retirement expenses - why change?

I am a retired Fed (CSRS). With the ability to carry your federal health insurance into retirement you should be sitting pretty without changing a thing. Don't let the "conventional wisdom" drive you to do something that will cause you to lose sleep. You have done great with your conservative methodology.

Grumpy

[cute fuzzy bunny]

Cash wasnt in the chart because it wasnt in the one I lazily found!

However, cd returns arent that far removed from treasury/long bond returns. Market efficiency says that if it was, nobody would buy shorter maturity bonds.

Your ROR is pretty close to the long bond ROR. Once taxes and inflation are factored in, the average investor is looking at a sub 1% return.

Not knocking it, but when I see someone invested this way, I just cant help but hope that they die on schedule...

[Geoffrey]

I sincerely appreciate all of the advice. I did leave out a few salient facts. I'm 59 years old, will be entitled to social security, and I'll receive a Government pension somewhere in the neighborhood of 20K per year. I figure I need 55-60K per year, adjusted for inflation to maintain a satisfactory lifestyle. My wife and I have no kids, so no need to leave a large stash for others. Although we could spend our reserves down to zero, I wouldn't want to do so simply because I've never felt comfortable without a sizeable cushion -- call it the squirrel reflex. Ideally, I'd like our savings to generate somewhere between 35 and 40K per year, even though (with my pension and SS, I could probably get by with less). Given savings of approximately $1.33M, my question boils down to this -- what is the safest way to generate 35-40K per year, again adjusted for inflation. Or, what's the ultimate coward's portfolio for someone looking to beat money market returns, but doesn't have the stomach for very much risk.

[Sam]

Quote:

Originally Posted by cute fuzzy bunny Try it a little longer than 8 years...

Nice chart. My only problem with it is the exceptionally high 31% tax rate, especially when considering that most retirement account are tax deffered.

[cute fuzzy bunny]

I think an early retiree with a seven figure cash/bond portfolio, using it for expenses, would easily land in the 31% combined tax rate.

I cant imagine the benefits of keeping a lot of cash in a tax deferred account, but i'm sure something can be cobbled up...

[Nords]

Quote:

Originally Posted by R Wood I have been doing CD Ladders for 28 years (1979 to date). Average return in those ladders has been a 5.7% return over the same 28 years.

So where the heck were you when the Fed lowered interest rates to 1% and my father-in-law's 7% CDs were rolling over at less than half that?

Eight years of interest-rate or inflation data isn't worth the effort to post. For example, Dimson & Marsh estimated 20th-century American inflation at a bit over 3%. However over the last 30 years it's been 5%. What numbers should the OP choose for his asset planning?

And don't even get me started on the putative relevance of CPI data to one's personal spending.

I've seen the emotional effect of a 100% CD/Treasury portfolio. By 2003 my parents-in-law were realizing only half as much income as they'd been getting since his 1994 retirement. 1.75% Treasuries weren't making their expenses, but there was absolutely no freakin' way that they were going to consider dipping into the principal-- even though both of them were in their high 60s at the time and also receiving SS. They were convinced that the Depression was coming back to end their lives, just like they'd started them, and they were clamping down on spending so hard that Jack Benny would've been envious. Of course I'm not bitter or anything about the way their angst trickled down to our generation, but I sure got tired of the eternal fretting about excessive gas consumption during weekly errands & shopping, $40 electric bills, and food prices.

We can fling data at each other all day but the most benefit to the OP will come from educating themselves, determining their own appropriate asset allocation, and being able to live with it even under extreme conditions. They may decide to stick with 100% cash as long as they understand the corrosive effects of inflation in a low-interest-rate environment. One of the benefits of a lifestyle/target fund is that the process is largely hidden from the customer so that they can remain blissfully ignorant...